The strong first half was particularly impressive given slower economic and profit growth. Although first quarter gross domestic product (GDP) growth in the United States was solid at 3.1 percent annualized, the details suggest slower growth in coming quarters.

And even though first quarter earnings results were better than feared, the earnings increase from S&P 500 companies was marginal, and the next two quarters may bring more of the same. In addition, growth internationally has been challenging, particularly in Europe and Japan, while geopolitical risk remains heightened (Iran).

Market Leadership

We don’t particularly like the stock market’s reliance on monetary policy support from the Fed, but that’s the market environment we are in right now. Beyond that, sector leadership has been somewhat disconcerting. We would consider this bull market’s foundation to be stronger if it were being driven by more convincing leadership from the cyclical sectors. While cyclical sectors mostly outpaced defensives in the first half, it wasn’t convincing. And the defensive sectors (consumer staples, healthcare, real estate, and utilities) have each outperformed the S&P 500 over the past year [Figure 1] even as the broad stock market benchmark gained 9 percent during that same period (through July 2, 2019).

Gold, which has benefited from the Fed’s U-turn and also exhibits defensive characteristics, has also outperformed the S&P 500 during this time, based on the Bloomberg Gold Subindex. At the same time, the more defensive large caps have beaten small caps, based on the Russell indexes; and transports, often viewed as a barometer of economic activity, underperformed, based on the S&P 500 Transports Index.

We continue to favor cyclical sectors and expect performance to improve in the second half. Technology has been a bright spot all year, and financials led during the second quarter. However, we would like to see more consistent leadership from these groups as a sign of this bull market’s health.

After such an impressive start and now that it’s four months past the bull market’s tenth birthday, how much is left in the tank? In the 1990s, strong starts to the year (15 percent or larger gains) in 1995, 1997, and 1998 were followed by additional strength as one of the strongest bull markets in history lasted 10 years.

However, when we look back further in time to 1983, 1986, and the infamous 1987, we see that strong starts were followed by weakness [Figure 2]. The sample size is small, but an average or median second-half gain of roughly 3 percent in these nine cases wasn’t too bad, and stocks rose more than they fell.

The average pullbacks were larger in these instances, with the 1987 Black Monday crash providing a dramatic example. In a typical year, the maximum S&P 500 pullback during the second half has been about 10 percent. In the nine strong starts listed in the chart, the average pullback was 21 percent (again, skewed by 1987). Taking out 1987, the median calculation results in an average annual pullback of 9 percent, similar to the average across all years. This analysis suggests that this second half may not be too different from most years.